Taxes are too high
Tax reform without tax cuts is a disaster. But then tax cuts without tax reform are a missed opportunity. Without both we are heading for a sad fate
If you combine all the taxes on labour income – Income Tax, Employees’ National Insurance and Employers’ National Insurance – then the real Basic Rate isn’t 20 percent, it is 40 percent. The Higher Rate which more and more people on modest incomes are being dragged into is 50 percent. And the “50p” Additional Rate which George Osborne has pledged to cut is really more like 60 percent.
With what is left, British families need to pay Value Added Tax, Fuel Duty, Stamp Duty and innumerable other consumption taxes.
The biggest cons are the taxes which politicians pretend are imposed on “business”. A company is no more capable of paying tax than a toaster is capable of playing cricket. Taxes on a company are paid by its shareholders, its customers and, the academic evidence suggests, in large part by its workers. Your wages are depressed by high taxes before they even reach your paycheque.
Despite all of those taxes, we are all constantly told that we don’t pay any tax. Whether it is the rich employing expensive lawyers and crafty accountants or the middle class paying cash in hand, we all stand accused of the cardinal sin of tax dodging.
The extent of avoidance and evasion is exaggerated. There are some estimates which suggest huge amounts of tax are avoided but they are based on dodgy assumptions. The more reliable official estimates are lower at around £40 billion. Most of us pay most of our taxes fair and square. That includes the rich. The top 1 percent of earners pays nearly 28 percent of total income tax receipts, for example, and the top 5 percent of earners pay 47 percent.
However there are clearly some people who are able to actually avoid their taxes. Jimmy Carr became the face of tax avoidance earlier this year. And there are many more people who appear to be avoiding their taxes, particularly large corporations – see the Starbucks story this week.
That perception of widespread tax avoidance has created an atmosphere of poisonous resentment. It has justified countless arguments for yet higher rates and entirely new taxes. On the grounds that when we catch people we had better take all we can. And it has led to demands to infringe financial privacy, starting with the candidates in the recent London Mayoral race.
At the next election the party leaders might be forced to follow that sad example. If we allow the collapse in the legitimacy of our tax system to continue, we risk the kind of breakdown in trust that we have seen in Greece.
How can we change that?
The 2020 Tax Commission established by the TaxPayers’ Alliance and the Institute of Directors proposed a six point plan to fix our broken tax system, and replace large parts of it with a Single Income Tax:
1. Taxes should be cut to 33 percent of national income.
2. Marginal tax rates should not exceed 30 percent, and the personal allowance should rise to £10,000. That includes National Insurance and would be a substantial cut from the current real Basic Rate of 40 percent.
3. Taxes on capital and labour income disguised as business taxes should be abolished, and replaced with a tax on distributed income.
4. Transaction, wealth and inheritance taxes should be abolished.
5. Other consumption taxes need to stay for now, but transport taxes should be cut.
6. Local authorities should raise half of their spending power from local taxes. With any local taxes used to finance further cuts in central government taxes.
There are of course some further complications. Pensioners need special arrangements so that they are paying less, not more, tax with the abolition of National Insurance. And we put a lot of work into studying how to deliver the simpler tax on capital income which should replace the current messy mix of Corporation Tax, Income Tax, Capital Gains Tax, and various other transaction taxes.
The fundamental principle is simple though: as far as possible, everyone should pay a fair share, no more and no less, of their income in a single transparent tax on each stream of income.
With a much simpler tax system it will be easier to understand what we are supposed to pay. It will take less time and effort to understand and comply with the rules. At the same time it will be easier to understand what everyone else is supposed to pay.
When corporations are accused of dodging their taxes we won’t need to have an almost existential debate about their real profits, and how much they should be paying. It will be very apparent, very quickly, whether they are paying the right amount.
It will also be easier on HMRC. They will no longer have to focus so much time and attention on administering the rules. They can instead have their staff spending their time tackling those genuinely abusing the system.
Finally, and most importantly, with lower taxes we will improve the incentive to work, save, invest, and innovate in Britain. No crackdown can tackle the tax avoidance strategy of last resort: take yourself and your money elsewhere. Or don’t come here in the first place.
More investment and innovation will mean stronger growth in productivity, stronger economic growth and higher wages. Economic modelling by the Centre for Economics and Business Research found that the 2020 Tax Commission’s proposals would add 8.4 percent to national income over fifteen years. Rising prosperity and a tax system people can trust will restore the legitimacy of Britain’s taxes.
It is a significant prize. But there is one thing needed to make tax reform a political winner: tax cuts. The disaster of the last Budget shows that tax reform without tax cuts creates too many losers.
Taxes are too high and not enough money is being left in people’s pockets to spend supporting themselves, their own families, and their own causes. So long as that is the case, our tax system will remain utterly dysfunctional.
Tax reform without tax cuts is a disaster. But then tax cuts without tax reform are a missed opportunity. Without both we are heading for a sad fate with more and more resentment and mistrust; higher and higher tax rates; and an economy stuck deeper and deeper in a growth-free quagmire.
Matthew Sinclair is the Director of the Tax Payers' Alliance and author of Let Them Eat Carbon. He tweets at @mjhsinclair
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